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by demallien 3832 days ago
If this was true, Lehman Brothers would still be in operation today. Derivatives, by their very nature, are harder to truly evaluate in terms of value, and the chance of them going horribly wrong has already been demonstrated as being non-zero (see GFC).
1 comments
retube 3832 days ago
Lehman went bust because liquidity in the credit markets dried up - i.e they were unable to roll short-term financing to fund longer-dated balance sheet. The markets thought Lehman had big exposure to the US residential and commercial mortgages, hence they couldn't borrow, hence they went bust.

A shame because they weren't actually bankrupt - PWC has now recovered 100% of liabilities with assets to spare.

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jackcosgrove 3832 days ago
How long did the recovery take? PWC recovered those assets now, rather than then. In the mean time there was a huge reflation of the stock and housing markets, powered by the Federal Reserve in the short term and a return of confidence in the medium term.

You can't treat mass psychology as an externality. Austerian policies rely in part on disciplining debtors to restore confidence in market transparency and the rule of law. If thousands of households lost their homes when their cash flow could not meet their debt payments, why shouldn't a bank go bankrupt when its cash flow cannot meet its debt payments? Lehman was just the bank that couldn't find a seat when the music stopped, and that's fair.

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AngrySkillzz 3832 days ago
Yes, but that has nothing to do with the notional value of derivatives or derivatives "blowing up." They had a liquidity crisis because of fear; people stopped trusting their commercial paper and were skeptical of lending to them with repos backed by difficult-to-value mortgage-backed securities.
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demallien 3831 days ago
"The markets thought Lehman had big exposure to the US residential and commercial mortgages, hence they couldn't borrow, hence they went bust."

This is the sort of thing I mean when I say derivatives are hard to evaluate correctly. So yeah, Lehmans totally went bust because of their large amounts of trading in CDS.

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